Foreign Exchange

If you’re in the business of importing or exporting you may pay or receive payment for your goods in a foreign currency, which involves some exposure to currency fluctuations.

Exchange rates in Australia operate under a floating exchange rate environment, which means market forces of supply and demand dictate the value of the Australian dollar (AUD). As such, the dollar’s value can vary, and depending on market conditions, the variation can be significant.

Since it was floated in 1983 the AUD has had an average annual trading range of approximately 11 US cents. What does this mean for importers and exporters? It can mean a significant impact on your bottom line.

Impact on Importers
Let’s say you’re an Australian based importer of shoes, and you place an order for USD$500,000, with delivery due in three months. At the time the AUD/USD is trading at 70 cents, so you set aside AUD$714,286.00 to cover the cost of the order. But when the order arrives the AUD/USD is trading at 66 cents and the bill now comes to AUD$757,576.00 and as a result you'll need to find an additional AUD$43,290.00.

Impact on Exporters
Let’s say you’re an Australian based exporter, expecting to receive USD$500,000 from a buyer in 90 days. Upon receipt of the payment you’ll need to exchange it for AUD.

If the AUD/USD is currently trading at 70 cents, the order will provide you with revenue of AUD$714,286.00. If in 90 days the AUD/USD is trading at 74 cents, the order will only provide you with revenue of AUD$675,676, which is AUD$38,610.00 less than today. By not implementing a risk management strategy, you’ve lost about AUD$40,000 on a single transaction.

Strategies to minimise risk
These examples illustrate that it’s good business practice to implement a strategy that helps to minimise your exposure to currency fluctuations. You can do this using a range of foreign exchange solutions.

Foreign Exchange Service
Our foreign exchange service allows you to buy and sell foreign currencies for commercial and personal purposes. Exchange rates are available in all freely floating currency pairs for value today, tomorrow or at spot.

Forward Foreign Exchange
Forward Foreign Exchange is a traditional risk management tool used to obtain protection against adverse exchange rate movements.

By entering into a Forward Exchange Contract you are agreeing with the Bank to sell one currency amount and buy another currency amount at a fixed exchange rate on a future date. This allows you to ‘lock in’ a rate now for a specific time in the future, which enables you to plan for and budget your business expenses with more certainty.

Currency Options
A Currency Option provides the buyer with the right but not the obligation to buy or sell one currency amount against another currency amount at a specified exchange rate on a specified date.

Flexible Forwards
Flexible Forwards combine the security of a Forward Exchange Contract and the flexibility of a Currency Option. Your can protect your business against adverse exchange rate movements, as well as benefiting from potentially favourable movements.

Important information about advice
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances.

All products mentioned on this web page are issued by the Commonwealth Bank of Australia, view our Financial Services Guide (PDF 56kb). View Product Disclosure Statements (PDSs) for Foreign Exchange (PDF 128K), Foreign Currency Account (PDF 141kb), Foreign Currency Term Deposit (PDF 141kb), Flexible Forward (PDF 127kb), Flexible Forward Bonus (PDF 133K), Flexible Forward Cash Settled (PDF 129kb), Flexible Forward Collar (PDF 128kb), Flexible Forward Convertible (PDF 131kb), Flexible Forward Convertible Plus (PDF 141kb) and Flexible Forward Convertible Knock Out (PDF 151K) and consider them before making any decision about these products.